Can I cite this Pandemic to back out of a deal?

Question

I have a property under contract where the numbers work and its all good etc.

It will stretch my cash reserves if I go through with the deal because looking through the lease agreements 90% of the tenants work in jobs that are closed for 30 days. And it's not like day 31 I get my rent checks either.

Im in the position I would rather sit on my cash for a few months than deal with the stress and weight of all this going on.

My questions is, Can I legally back out of this contract citing a "Pandemic" "Act of God" or something like that??

Need Help!!

Brian Bradley · Answer

@Evan Polaski no problem.

Their is a good article written by Finley Law Firm in Ohio about this specific topic.

“It’s a hot topic in Ohio real estate law with the problem for sellers and Realtors of buyers backing out after tying up a property for15to 30 days. Contracts mean something. And so contingencies can provide an out. But contracts are written to be enforced and if a buyer has not threaded the needle and properly terminated a contract pursuant to contingency, then the buyer is obligated to perform. If not, they can be sued for either Specific Performance, or money damages. But earnest money does not define or limit the damages available. The buyer has ‘open-ended exposure for the seller’s damages arising from a breach.’” Courts in Ohio are cracking down on this.

Brian Mollo · Answer

I'm not an attorney, so I'll leave that advice to the experts on this site. But some states have a 'force majeure' clause (the right of a party to suspend or terminate performance when circumstances, which the parties could not have anticipated and are beyond their control, make performance of the contract impossible or impracticable) in their contracts so look into that, as I'd imagine this would qualify. California even created a COVID-19 form specifically to handle this situation adopted by our state's Realtor Association; see if your state did the same. I backed out of a deal last week where all contingencies were removed; seller wants to keep the EMD, but I am pretty confident I'll get it back in any mediation or arbitration, if necessary. We're also in a Stay @ Home order, so that helps my cause. Along the lines of some other advice, a less drastic route would be to have the seller would agree to delay the COE so you (and them) can get a better idea of how things shape up over the next several weeks, including April's rent. Might be an opportunity to renegotiate as well. No one in their right mind thinks things are the same as when you when under contract originally. Good luck.

Daniel Smyth · Answer

Well, I would laugh at you if you claimed an "Act of God" to get out of it, listing the virus precautions as a reason.  I know we want to believe we can blame the virus precautions for everything, but I wonder if there is another way. It just seems lame to me. it might work, but it seems just lame.

I do see your concern, and you are right to be concerned.

I don't know the contingencies you have in your purchase deal, but if your deal is contingent on getting bank financing, you may be in luck. if so, I know my banker would gladly listen to a request from me to deny my loan amount for this deal. I would then, see if you could negotiate with the seller to quit his rights in this contract for a month after the nation gets back to work.

Actually, with things as they are, things that matter have changed. How much earnest money will you lose? I might consider that loss a bonus, if your competing the deal means that you bought a bunch of rentals that had zero cash-flow.

Prices of things at builder supply houses are going up. Wages are going down. I would not risk everything on some idea that the government will give you the back rent you should have had.

Now, is the time to re-negotiate. If you leave this deal, the seller knows there will be no one in the weeds waiting to pounce on it. Figure an offer with a devalued cash-flow for the 1st year, and 10% more for renovation materials. Understand that taxes will go up at least 5% too! I think my numbers are conservative. But who knows for sure until the party is finished?

I had a great deal in line to purchase early March. I would have done well, with the same economy at that time. Today I smile as I see a for sale in front of my chosen house. It will be there when the economy begins to return, and the price will reflect a much lower asking price.

Lower price coming, and I already did the work to see what needs to be done! I can wait.

I wish you well!

Evan Polaski · Answer

@Brian Bradley, I whole heartedly agree that a local attorney is the best option, and I am not one, to be clear.  However, I did have a client that was backing out after waving all contingencies.  The legal advice I was given, besides consult with an attorney, is that specific performance cannot be enforced on the buyers side, only sellers side.  Buyers backing out and being sued can result in financial specific performance, of which the resulting settlement would be the difference between your contract price and the ultimate sale price of the house.

I.e. you are under contract for $250k as buyer.  Back out after waiving contingencies.  Seller sues you.  They cannot bring suit until the house has been sold to another party, because there are no damages yet.  If it sells for $200k, they can sue the buyer for the $50k they "lost" for buyer not fulfilling contract.  However, continued costs through delayed holding time is not recoverable.  Again, this is the advice I received from an Ohio attorney specific to a deal I was working on as an agent.

Again, you should consult a local attorney that knows your situation and local laws.

Brian Bradley · Answer

@Robert Obniski talk to a real estate lawyer in your area or the state and county that the deal is getting done in. Look over all the contingencies and see what you might be able to argue out of or has not been performed. Appraisals has been an issue in some states causing deals to fall apart. You deposit might be lost as other said. @Evan Polaski is not fully correct in saying that you cannot be forced to purchase a property. Their comes a point in deals where you are on the hook for lost damages and a court can order "specific performance" as a remedy. And it is a very common remedy in real estate. A quick basic intro to specific performance is If one of the parties does not honor the contract by breaching the terms of the contract, the harmed party often does not want money damages but instead wants actual performance of the terms of the contract. This remedy is known as specific performance. This remedy arises when a court orders the party to fulfill the contract. Specific performance is considered an equitable remedy and is governed by equitable principles. So talk to a real estate attorney and have them go over your deal. If you want out, they generally are good at finding a way out, but you might be on the hook for some money. But also keep in mind depending on the stage and other factors, the non breaching party always have the argument of "specific performance."

Brian Bradley · Answer

@Brian Mollo  @Evan Polaski just make sure that you talk to a knowledgable attorney on this before hand so they can go over every legal liability and option before you make a decision that has liability that can come with it. As always should be the case, one must first look to explicit language in the contract relating to “force majeure,” “impossibility or impracticability of performance,” “ purpose,” and “early termination.” In many states around the country, such as New York, the specification of any force majeure event necessarily precludes other force majeure events from being included within the definition. In other words, if earthquakes and fires are listed, but viral pandemic is not listed, many of these courts  will not find the force majeure provision to excuse performance obligations. However, California interprets these provisions a bit “less narrowly” than other states, in as much as a non-listed event can still fit within a written force majeure provision if it is “unforeseeable at the time of contracting”. See Autry v. Republic Productions (1947) 30 Cal.2d 144.

Ca is its own very different beast and politics and State Legal system.

COVID-19’s classification as a “pandemic” by the WHO will trigger a force majeure clause that expressly accounts for “pandemics.” That said, the declaration of pandemic standing alone—without a reference to pandemics in a force majeure clause—will not automatically constitute a force majeure given the courts’ focus on whether the event is specified within the contractual language. Clauses that are silent on pandemics, epidemics, or other viral outbreaks are likely to be insufficient for a force majeure defense due to COVID-19, unless, of course, courts liberalize the force majeure analysis to account for market realities.[11] If a force majeure clause clearly covers COVID-19 as a qualifying event in light of the WHO’s declaration, parties seeking to invoke the provision will not need to establish the event was unforeseeable, but will still need to show: (1) that they took steps to mitigate the damage, and (2) that performance is truly impossible (or meets any other standard the clause requires).

Bricker & Eckler based out of Ohio wrote a great article on this specifically on Ohio law for you Ohio residents.

"The party seeking force majeure bares the burden.

United States v. Brooks–Callaway Co. (1943), 318 U.S. 120.) Under Ohio law, the party invoking force majeure bears the burden of proof. (See, e.g., Stand Energy Corp. v. Cinergy Servs., Inc., 144 Ohio App. 3d 410, 416 (2001).) As the court in Stand Energy noted, force majeure clauses are included in commercial contracts to provide flexibility in a volatile economy. But, a party cannot be excused from performance merely because performance may prove difficult, burdensome or economically disadvantageous. Id. (citing State ex rel. Jewett v. Sayre (1914), 91 Ohio St. 85).

They identify 7 elements to review if you are considering this in Ohio:

1. Read your contract and identify the relevant clauses.

2. Confirm if the contract actually has a force majeure clause.

3. Examine that contracts definition. of force majeure.

4.Research the relevant state case law before doing anything.

5. Evaluate Causation. A party claiming force majeure generally must show that the force majeure event proximately caused a contracting party to be unable to perform. In addition, courts generally require the party invoking the clause to use reasonable efforts to avoid the effects of force majeure. A factual analysis will be necessary

6. Comply with any notice provisions

7. Identify available remedies for a force majeure event. "

Brian Bradley · Answer

@Evan Polaski that is absolutely incorrect. ANY party has the legal right to seek specific performance. It is an "equitable right" of EITHER party when damages will not be good enough (inadequate) or the item is unique. All real estate is considered unique. This is day one of real estate law in law school and heavily taught on all state bars. So that is just wrong advice you got. The non breaching party (buyer or seller) has a right to seek specific performance. Depends on the damages and stage of the deal if it will be awarded. "The buyer may pursue specific performance if the buyer is unwilling to carry out his or her obligations under the contract. Specific performance is allowed in real estate contracts because each parcel of land is unique and monetary damages are not adequate. The buyer must tender the purchase price in order for specific performance to be granted." "The remedy of specific performance is also available to sellers in many cases. A buyer may not want to go through with a sale and try to back out. However, some states allow the seller of real property to file a lawsuit against the buyer for specific performance. This remedy is permitted so that there is symmetry between the remedies available to buyers and sellers. However, this remedy is not available in all jurisdictions, such as in areas where the state believes that money damages are adequate to compensate the seller." it comes down to the language of the contract and if specific performance was included.

Robert Obniski · Answer

Thank You all, we have decided to go forward with the deal.

Evan Polaski · Answer

@Brian Bradley I appreciate your clarification.  Thank you.  I would assume based on your explanation, Ohio may be one of those states that monetary damages are considered adequate, which is what was outlined to me.

Blake Garcia · Answer

Attempt to push closing to say the 10th of the month where most rent has been collected but to be  pro rated. Closing at beginning of any month just makes for a long first week.

Depending on the class of property and tenant you may be very correct about starting off in a pinch.

If he cant collect you may have a point to renegotiate or a mercy check at closing.